Asset Price Dynamics with Limited Attention

Terrence Hendershott, Albert J. Menkveld, Remy Praz, Mark Seasholes

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

We identify long-lived pricing errors through a model in which inattentive investors arrive stochastically to trade. The model's parameters are structurally estimated using daily NYSE market-maker inventories, retail order flows, and prices. The estimated model fits empirical variances, autocorrelations, and cross-autocorrelations among our three data series from daily to monthly frequencies. Pricing errors for the typical NYSE stock have a standard deviation of 3.2 percentage points and a half-life of 6.2 weeks. These pricing errors account for 9.4$\%$, 7.0$\%$, and 4.5$\%$ of the respective daily, monthly, and quarterly idiosyncratic return variances.

Original languageEnglish (US)
Pages (from-to)962-1008
Number of pages47
JournalReview of Financial Studies
Volume35
Issue number2
DOIs
StatePublished - Feb 1 2022
Externally publishedYes

Keywords

  • G12
  • G14

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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